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Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine...

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35% of sales and fixed costs are $170,000 per year. Machine B costs $5,100,000 and will last for nine years. Variable costs for this machine are 30% of sales and fixed costs are $130,000 per year. The sales for each machine will be $10 million per year. The required return is 10% and the tax rate is 35%. Both machines will be depreciated straight-line over their lifetimes. a.What are the equivalent annual costs of each machine?b. Which machine should Vandalay Industries select?

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Expert Solution

Data
Machine A Machine B
Purcahse cost      29,00,000.00      51,00,000.00
Life                       6.00                       9.00
Variable cost 35% of sales 30% of sales
Fixed cost         1,70,000.00         1,30,000.00
Sales value per year 1,00,00,000.00 1,00,00,000.00
rate of return 10% 10%
Tax rate %                     35.00                     35.00
Machine A
Equation
Variable cost Sale x 35%      35,00,000.00
Fixed cost         1,70,000.00
Total cost per year      36,70,000.00
Add: Initial cost      29,00,000.00
TOTAL      65,70,000.00
PVAF, 10%, 6 years From annuity table 4.3552
EAC 6570000/4.3552      15,08,541.51
Machine A
Variable cost Sale x 30%      30,00,000.00
Fixed cost         1,30,000.00
Total cost per year      31,30,000.00
Add: Initial cost      51,00,000.00
TOTAL      82,30,000.00
PVAF, 10%, 9 years From annuity table 5.759
EAC 8230000/4.3552      14,29,067.55
Based on Equalent annual cost method, project B should be selected being less EAC

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